Analysis On The Relationship Of FDI, RMB Exchange Rate And Chinese Labor Productivity

Since the 1980s, Foreign Direct Investment (FDI) by multinational corporations has been developing rapidly in the world. As one of the main driving forces of economic globalization and world economic growth, its effects on increasing national economic efficiency has attracted considerable attentions of governments in recent years. At present, how to measure the impact of FDI on Chinese economic efficiency, and how the changes in exchange rate will affect the inflow of FDI are issues draw widespread concerns.This paper is based on the literature on the effect of international capital flows, FDI technology spillover effect and other domestic Balassa Samuelson effect, combining with the characteristics of Chinese industrial structure, then use theoretical and empirical research methods to conduct quantitative and qualitative analysis on the dynamic relations of FDI, exchange rate and labor productivity. This paper is composed by the following sections:First, by observation on Chinese economic indicators, analyzes the important role of FDI in improving labor productivity in our country, as well as changes in the relationship between the RMB exchange rate and labor productivity. Secondly, using panel data empirical analysis, conducts FDI spillover effects model on sub-industry data of Chinese manufacturing and service industries on the period of 2004-2011. Then, using time series empirical analysis, based on the VAR model, using co-integration analysis, Granger causality test and impulse response function, studies the dynamic relationship between overall manufacturing and services FDI and labor productivity and the RMB exchange rate. The results suggest that the devaluation of the RMB exchange rate will promote FDI inflows on the manufacturing sector, reduce the inflow of FDI on the service industry. Moreover, the service sector FDI has a significant positive spillover effect on its labor productivity, while FDI spillover effect on manufacturing industry is insignificant. This result seems irrational, but combining with the findings of panel data analysis results, we can draw a reasonable explanation. With the economic structure optimization and upgrading, the economic momentum which domestic investment brings is weakening. To maintain high growth efficiency, China must grasp this opportunity to make full use of capital effects and spillover effects of FDI. Different open policies should be employed in different industries to effectively improve Chinese economic efficiency.